Financial liberalisation and economic growth in sub-Saharan African countries : dilemmas and prospects

Odhiambo, Nicholas Mbaya (2004-04)

Dissertation (PhD)--Stellenbosch University, 2004.

Thesis

ENGLISH ABSTRACT: This dissertation examines the dynamic effects of financial liberalisation on economic growth in three sub-Saharan African countries - Kenya, South Africa and Tanzania. The study was motivated by the current debate on the efficacy of financial liberalisation on the one hand and the painful experience some of these countries have had with the liberalisation of the financial sector on the other. Three critical questions are asked. Does financial liberalisation contribute positively towards increased economic growth through its influence on savings, financial deepening, and investment efficiency? Is the mechanism through which financial liberalisation affects economic growth in the study countries based on the volume or efficiency of investment? Does financial development, which results from financial liberalisation, Granger cause economic growth? Cointegration and error-correction techniques are used to investigate empirically the dynamic link between financial liberalisation and economic growth. The error-correction mechanism used is based on the Hendry and Ericson's (1991) general to specific model. In addition, the study uses a dynamic causality test based on the vector error correction model to examine the existence and the direction of causality between financial development and economic growth in the study countries. The theoretical and empirical underpinning of financial liberalisation as well as the controversies, challenges, and paradoxes that have emerged in the literature since the onset of financial liberalisation in the 1970s are also explored. Finally, the experiences of the study countries with financial liberalisation are reviewed in order to relate these experiences to the presumptions of the theoretical literature on the one hand, and to serve as a precursor to the econometric investigations on the other. Contrary to the results obtained from some previous studies, the results of this study indicate a strong support for McKinnon's complementarity hypothesis in Kenya, South Africa and Tanzania. The results apply irrespective of whether money demand and savings functions are estimated in static cointegration regression or in the dynamic formulation (error-correction model). This implies that the more attractive financial assets are the greater the incentives to invest in the study countries. The findings of the study also provide abundant support for the positive impact of financial liberalisation on financial deepening in the study countries. However, the impact of financial liberalisation on investment efficiency is not the same in the three study countries. Although financial liberalisation seems to positively influence investment efficiency in Kenya, it fails to influence in a robust manner the level of investment efficiency in South Africa and Tanzania. The results on the long-run causality between financial development and economic growth indicate that the direction of causality is sensitive to the choice of measurement for financial development. On balance, a demand-following response is found to be stronger in South Africa and Kenya, while a supply-leading response is found to be stronger in Tanzania. In conclusion, it is worth mentioning that, while the positive role of financial liberalisation on economic growth through its influence on savings, financial deepening and investment efficiency is overwhelming, the clarity and strength of this beneficial role differs from country to country and over time.

AFRIKAANSE OPSOMMING: Die proefskrif ondersoek die dinamiese gevolge van fmansiële liberalisasering op ekonomiese groei in drie lande in Sub-Sahara Afrika, naamlik Kenia, Suid-Afrika en Tanzanië. Die aansporing vir die studie spruit uit die huidige debat oor die werksaamheid van finansiële liberalisering enersyds en andersyds die pynlike ervaring van sommige lande wat hierdie proses in hul fmansiële sektor deurloop het. Drie vrae word gestel. Dra finansiële liberalisering by tot vinniger ekonomiese groei deur die invloed wat dit het op besparing, finansiële verdieping en die doeltreffendheid van investering? Is die meganisme waardeur fmansiële liberalisering sy invloed op ekonomiese groei in die drie gemelde lande uitoefen op die volume of doeltreffendheid van investering gebaseer? Is fmansiële ontwikkeling as gevolg van finansiële liberalisering 'n Grangeroorsaak van ekonomiese groei? Ko-integrasie en fout-korrigeringstegnieke word gebruik om empiries die dinamiese skakel tussen finansiële liberalisering en ekonomiese groei te ontleed. Die fout-korrigeringstegniek is gebaseer op Hendry en Ericson (1991) se algemene-tot-spesifieke model. Verder, maak die studie ook gebruik van 'n dinamiese oorsaaklikheidstoets, gebaseer op die vektorfoutkorrigeringsmodel, om die bestaan en rigting van oorsaaklikheid tussen fmansiële ontwikkeling en ekonomiese groei in die drie studie-lande te ondersoek. Die teoretiese en empiriese onderbou van fmansiële liberalisering word ondersoek en so ook die dispute, uitdagings en paradokse wat in die literatuur verskyn het sedert the aanvang van finansiële liberalisering in the jare sewentig.Laastens, word die ervaring van die studie-kande met finansiële liberalisering in oorsig geneem om sodoende hierdie ervaring met die vertrekpunte van die teoretiese literatuur enersyds te verbind en andersyds as die inleiding tot die ekonometriese ontledings te dien. In teenstelling met die resultate wat in sekere ander studies bereik is, dui die resultate van hierdie studie op sterk steun vir McKinnon se komplementariteits hipotese in Kenia, Suid-Afrika en Tanzanië. Dit geld ongeag of die vraag na geld en die besparingsfunksies geskat word in statiese ko-integrasie regressie of deur dinamiese formulering (foutkorrigeringsmodel). Dit impliseer dat hoe aantrekliker finansiële bates is hoe groter is die aansporing om in die studie-lande te investeer. Die bevindings van die studie bevestig ook voldoende die positiewe invloed van finansiële liberalisering op finansiële verdieping in die studie-lande. Die effek op die doeltreffendheid van investering is egter nie dieselfde in die drie lande nie. Terwyl finansiële liberalisering 'n positiewe ivloed op die doelterffendheid van investering in Kenia het, het dit geen robuuste invloed op die doeltreffendheid van investering in Suid- Afrika en Tanzanië nie. Die resultate van die langtermyn-oorsaaklikheid tussen finansiële ontwikkeling en ekonomiese groei dui daarop dat die rigting van oorsaaklikheid gevoelig is vir die maatstaf wat gebruik word om finansiële ontwikkeling te meet. 'n Vraag-geinisieerde reaksie is sterker in Suid-Afrika en Kenia, terwyl 'n aanbod-geleide reaksie sterker in Tanzanië is. Terwyl die positiewe rol van finansiële liberalisering op eknomiese groei deur middel van die invloed op besparings, finansiële verdieping en investeringsdoelterffendheid oorweldigend is, verskil die duidelikheid en sterkte van hierdie rol van land tot land.

20160203

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